Educational Articles

Retail Roundup - June 26, 2014

Andre J. Costanza
| June 26, 2014

The retail industry has remained a hotbed of activity in recent months, with a slew of mergers and potential pairings essentially dominating the headlines. Meanwhile, first-quarter earnings results have continued to pour in. (It should be noted that most retailers have a fiscal year that ends on the Saturday closest to January 31st of the following calendar year.) Companies mentioned in this review include Pier I Imports (PIR), Francesca’s Holdings (FRAN), DSW Inc. (DSW), Aeropostale (ARO), Ulta Salon (ULTA), Christopher & Banks (CBK), Men’s Wearhouse (MW), Express (EXPR), Family Dollar (FDO), Dollar General (DG), and lululemon athletica (LULU), Signet Jewelers (SIG), and Fred’s Inc. (FRED).

Mixed Bag of Results

Earnings reports have continued to trickle in for retailers since our previous coverage a month ago, but results, for the most part, remained disappointing. Pier 1 Imports, for example, saw earnings fall well short of expectations as heavy discounting weighed on margins. Making matters worse, management tempered its full-year outlook like so many other goods purveyors have been doing. Indeed, in the same vein, Francesca’s Holdings followed suit lowering its fiscal 2014 guidance after coming up short of first-quarter estimates due to a still-sluggish retail environment and unfavorable weather conditions. This seemed to be the norm throughout the retail segment, with other notable disappointments, including Fred’s Inc., DSW Inc., and Aeropostale.

Even still, there were some bright spots. Ulta Salon, for one, saw its shares rally after the beauty supplies retail chain announced that it handily exceeded first-quarter expectations. A burgeoning e-commerce business played a big role, helping the top line regain some steam. Christopher & Banks, meanwhile, also inked better-than-expected April-period results, prompting management to issue favorable guidance.

On Sale

The highly anticipated merger of Joseph A. Banks and Men’s Warehouse has been finalized. Banks will no longer be included in our coverage after being acquired by industry peer Men’s Warehouse for $65.00 per share in cash. At the conclusion of the deal, MW now operates over 1,700 stores, with approximately $3.5 billion in pro forma sales. The transaction was not exactly smooth sailing, with multiple counter offers and even an attempt by Joseph A. Banks to buy MW at one point.

Now, word is that apparel retailer Express is being eyed by private equity firm Sycamore Partners. Sycamore, which owns a 9.9% stake in the young adults clothing retailer, is said to be doing its due diligence and obtaining financing. It is important to note that Sycamore’s management previously worked for another private-equity firm, Golden Gate Capital, which owned Express before it went public. Although Express shares jumped on the rumors, not everyone is excited about the prospects of being acquired. Express management, immediately adopted a poison pill, limiting shareholders from owning more than 10% of its stock after learning of Sycamore’s intentions.

Discount chains have not been excluded from the merger discussions, either. Activist investor Carl Ichan announced that he has acquired a 9.4% position in Family Dollar and that he intends to push for the company to merge with industry peer Dollar General. Family Dollar also instituted a poison pill. Shareholders rallied around the stock, regardless, bidding the stock up sharply higher.

Closing Up Shop

There are a few stocks that have been removed from our Survey since our last roundup a few weeks ago. Specifically, we have discontinued coverage of the nation’s second largest retail jewelry chain Zale Corp. after it was acquired by Signet Jewelers for $21 per share. Also, we’ve decided to end coverage of Wet Seal and Pacific Sunwear in an effort to focus our attention on stock’s garnering greater subscriber interest. Both have seen investor interest wane due to operating difficulties.

Bitter Farewell?

Oft in the news lululemon athletica saw its shares tumble after the company reported fiscal first-quarter results. Although the top and bottom lines both improved on a year-over-year basis, comparable-store sales mustered just a 1% gain and SG&A costs pinched margins. Meanwhile, management issued guidance that came up short of our earlier assessment. That said, the investment community is probably not focusing solely on the company’s financial health at this time. Dennis Wilson, the vocal founder of the yoga-inspired athletic apparel and accessories chain is said to be looking to get his foot back in the door after stepping down as the company’s Chairman just a few months ago and relinquishing his role as CEO back in 2005. Mr. Wilson has hired Goldman Sachs to explore his options to shake up the company’s board and perhaps gain more control going forward. Either way, he has gotten Wall Street’s attention, as the stock is up big on the news.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.